N17 Billion Debt Scandal:Yar’Adua positions to take over BankPHB from Atuche

The recent uproar over a N17 billion debt scandal involving BankPHB may have given impetus to the Yar’Adua family to start listening to the argument of close aides of President Umar Musa-Yar’Adua on the strategic need for the President to set off the process of enabling his family to take position for more dominant roles in the ownership structure of the bank.

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ATUCHE MAY LOSE BANKPHB DEPOSITORS’ NBILLION IN CONTROVERSIAL SPRING BANK ACQUISITION: CBN, SEC, NSE INVOLVED

There is no concise dictionary definition of a bubble share, yet, this rather strange sounding lingo, has become the issue at the heart of the alleged controversial acquisition of Spring Bank Plc by BankPHB Plc. Roughly, bubble share may mean shares held by an individual investor or body corporate that, however, cannot be classified as part of the shares outstanding of a company. In other words, the shares have no credible placement in the books of the company; neither can the shares be accounted for by the owners.

In the present case of the very first hostile take-over of a quoted company in Nigeria as being prosecuted by BankPHB, so much is at stake; the first being the billions of Naira of depositors’ funds being deployed to buy and mop shares of Spring Bank, the target company and the second being the corruption of the well laid out company acquisition process as enshrined in both the Investment and Securities Act 2007 and the Companies and Allied Matters Act. On the far end of the scary spectrum is the risk faced by retail investors that without much crosschecks jump into the Spring Bank shares buying spree propelled by sentiment of high volume activities on the shares of the bank.

The background to the Spring Bank present outrage dates to the eve of the ultimatum for banks in Nigeria to capitalize. Two days before the expiration of the December 31, 2005 date, six banks, among others, were confronted with the possibilities of getting under the slams of the Central Bank sanction of corporate erasure if they could not meet up with the N25billion minimum shareholders’ funds. Fourteen of such banks were dissolved for not making the deadline.

But the six, Citizens International Bank, Guardian Express Bank, ACB International Bank, Fountain Trust Bank, Omega Bank and Trans International Bank, barely made it to the mark. It is, however, no secret that the six banks were strongly edged on into the marriage of mandatory capitalization by the Central Bank of Nigeria. The six banks went into the merger discussion in two different camps; Citizens International Bank, Guardian Express Bank and ACB International Bank had earlier been engaged in merger discussion but the three of them could not mass the needed N25billion collectively. The same was the case with Fountain Trust, Omega Bank and Transnational Bank; the three banks together were not able to raise the required N25billion.

It was rather like a saving grace when CBN invited the six to a meeting and counseled them to pool resources so as to be able to raise the N25billion minimum capitalization requirement. The two camps, now frequently referred to as the Citizens-Guardian Group and Bank One hurriedly signed the merger papers, after signatures and all, Spring Bank was birthed. The Citizen-Guardian Group ownership structure has roots in the Igbo speaking South East Nigeria while Bank One ownership was rooted in the Yoruba speaking southwest Nigeria.

But the provisions of the merger agreement were not without a caveat. A specific requirement in the agreement noted the obvious limitation of the merging banks to conduct due diligence on one another. The due diligence would have allowed each bank to know the true worth of the others in the merger and would have helped to determine the share holdings to be apportioned to each merging bank based on the weight of investment the banks are bringing into the new entity. So, the merger agreement insisted that the six constituent members of the then newly birthed Spring Bank Plc would do a post-merger adjustment. This adjustment would enable the banks review the credibility and truth of the claims of each merging bank and be able to portion the Spring Bank’s shares equitably.

As at the time the merger agreement was signed, Guardian Express Bank claimed it had brought a shareholders’ fund to the tune of N9,580,000,000 while ACB International said it had N420,000,000 shareholders’ fund. Citizens International Bank’s investment in the then new bank was N7,600,000,000 of its shareholders’ fund as claimed. Omega Bank claimed it was investing N9,530,000,000 of its shareholders’ fund with Fountain Trust Bank and Trans International Bank investing N810,000,000 and N2,830,000,000 respectively of their shareholders’ fund. Shares of then new Spring Bank were, in the interim, divided along the individual contribution of each of the merging bank.

Since these were yet unverified figures, the shares allotment were considered interim, only made for administrative convenience. This is what makes the shares in the bank bubble shares.

Naturally, the banks in the Citizens-Guardian Group provided the Managing Director while Bank One provided the Chairman of the board. Mr. Mike Chukwu and Rev. Canon Segun Agbetuyi were appointed Managing Director and Chairman respectively.

But no sooner had the new bank gone into operation than issues relating to the integrity of the figures provided by each of the merging bank started rocking the bank. There were claims and counter claims of insider related loans collected in the legacy banks and had turned liabilities for the bank. But rather than the non performing loans to have been declared as, indeed, non-performing, they were declared as part of the working assets the legacy banks brought into Spring Bank. And more troubling was the allegation that Guardian Express Bank and Citizens International Bank had over-stated their financial positions.

A crisis of confidence ensued on the board of the bank and it thereafter spilled to the public arena with the chairman of the board buying advertisement space in the print media to express as disenchantment with the situation at the bank, especially, as it related to the obvious support the CBN Governor, Prof. Chukwuma Soludo was giving the Citizens Guardian Group.

In a rather pre-emptive move, the CBN Governor sacked the board of the bank, leaving the Managing Director and for the first time, the Governor, tongue in cheek, informed the Nigerian public that the bank did not, in fact, meet the minimum capital requirement when it was approved to operate in the consolidation regime. The sacking of the board with the exception of the MD was protested against; even as new forms of rancour enveloped the proposed board that was to be reconstituted by the CBN with selected representatives of the legacy banks.

Eventually, the CBN had to dissolve the board and constituted a new board with members that had no form of relationship with the legacy banks, Dr. Sulaiman Ndanusa was appointed Managing Director. That was on June 5, 2007.

Since the assumption of office by Ndanusa, the only thing that had changed in the existence of the bank is that it has been saved and taken from the precipice of imminent collapse through what stakeholders have called Ndanusa trust worthy and expert management style. In truth, the bank lost N20billion depositors’ fund in the heat of the crisis of confidence in May/June 2007.

What did not change, however, remains the integrity question that still hangs on the contributory capitalization figures the legacy banks had claimed in the run up to the merger. The post merger adjustment was meant to clean up the figures and it was not until such was done that the bank could be said to have returned to normalcy.

Ndanusa under-scored the much in a cover letter, dated April 20, 2008, he forwarded to the Central Bank in which he noted that: “It is the firm belief of our Board that there can be no effective resolution of the Spring Bank crisis without putting to rest the issue of post-merger adjustments.”

A joint CBN and Nigeria Deposit Insurance Corporation investigating team had earlier in October submitted a report of their investigation in which they asserted there were a lot of discrepancies in the claim of the banks.

Besides, the multiple insider related credits that afflicted the books of the bank, the most contentious issue in arriving at an agreeable post merger adjustment position was the shareholding status of the legacy banks as at the time they individually approached the stock market to raise fund to shore up their capital in the run up to the N25billion capitalization deadline.

The report questioned the holdings of Mr. Cosmas Maduka in the bank. Maduka who owns Coscharis Motors was the single individual largest shareholder in Guardian Express Bank, the legacy bank had been considered to be the highest fund contributor to Spring Bank based on figures presented in the rush of the merger talk. This had also secured a seat for Maduka on the Board of Spring Bank. But the report of the CBN-NDIC investigating team traduced Maduka’s claims.

Alluding to apparent book cooking by legacy bank, Guardian Express, the investigating panel submitted that the bank (Guardian Express Bank) opened its Initial Public Offer on April 18 and closed officially on May 18 2005.

“During that period, the investor (Maduka) who was a major customer of the bank was said to maintain two current accounts, number 01-00004611 and 01-00004612 in the bank. The two accounts were used interchangeably to accommodate the customer’s credit facilities at different times. Before and during the bank’s IPO exercise, transactions posted to account 01-0004611 were mainly credited entries. The account had a credit balance of N2,023,844,922.50 on 11/5/2005 before a cheque of N2,400,000,000 for the purchase of shares was posted into it. The Second account number 01-00004612 which was purportedly opened in September 2004 carried mainly the debit transactions of the customer. The debit balance in the account peaked at N403,211,520.76 on 12/10/2004 before it was brought down to zero balance on 24/12/2004,” the report observed.

The investigating team report further noted that: “However, a review of the customer’s credit files showed that during that period (January to May 2005) he (Maduka) was enjoying credit facilities totaling N2,553,000,000, including two CPs of N1.953 billion and N310million respectively. In other words, the bank did not disclose the account that harboured the customer’s credit facilities during the IPO. We noted further that on June 14, 2005, shortly after the official closure of the IPO, account number 01-00004612 mentioned above which was suspended between January and May 2005, resurfaced and posting of debit transactions into it continued until 20/4/2006 when the debit balance on the account peaked at N2,548,797,899.48.”

The investigating team then averred that: “On that date, the balance was transferred back to account number 01-00004611. Considering the above facts, it is clear that the investor’s facilities during the IPO were merely suspended. As at December 30, 2005, the account balance was N5,961,522.40 (debit)”.

On account of these observations, the investigating team report recommended that the entire investment by Maduka arising from this transaction be rejected because it was financed with facilities from the bank.

This same bank accounting manoeuverings were located in the account of Chief Anthony Ifeyichukwu Ezenna, the proprietor of Orange Drugs.

“Similar to Coscharis Motors Limited, two accounts were maintained fro the investor/customer.” The investigating team report informed. “Account number 02-00022011 and 02-00022013, Account number 02-00022011 through which the customer paid for the shares recorded mainly credit transactions of the customer during the IPO. The balance in the account on 19/5/2005 was N1,031,046,215 (credit) before the cheque of N1,000,800,000 for the share purchase was posted. The second account harboured the debit transaction of the customer. The debit transaction of the customer during the period of the IPO which totalled N1,086,197,382 including interest charge were post valued to August 2005, that was three months after the transaction date. That debit balance increased to N1,170,243,085.22 as at June 30, 2006.”

Based on the revelation arising from the investigation of the books of the bank, the CBN-NDIC investigating team recommended that the entire investment made in the bank be rejected as it was financed from facility from the bank.

The grouse of the CBN-NDIC investigating team had to do with the financing of the purchase of the Guardian Express Bank Initial Public Offer with the bank’s depositors’ fund illegally loaned to the directors.

There were other cases too. The investigating team was particularly enraged with the inappropriateness of the account cooking conduct of Citizens International which it (investigating team) submitted that: “Subsequent to its IPO, Citizens International Bank (CIB) debited its customers’ deposit accounts without their consent as consideration for fully paid up shares of the bank. Following the customers’ protest, the bank created a fictitious loan account in the name of Citizens International Stockbrokers Limited (CISL) in order to make refund to these aggrieved customers. The expectation was that as CISL sell their shares, the loan will be defrayed. It is the on-going investigation that has enabled us to establish a link between the CISL and the IPO exercise of legacy CIB.”

On the basis of this discovery, the investigating team recommended that: “The sum of N5,107,084,950 involved in deposit-equity conversion…should be removed from the share capital of Citizens International Bank.”

Other anomalies too many to be recounted here were discovered by the investigating team; the recommendations of the investigating team were for the purpose of streamlining the share capital of the legacy banks in Spring Bank and to be able to determine which of the directors and investors in the Spring Bank should have what percentage ownership of the consolidated bank.

However, according to FORTUNE&CLASS investigations, it is these contentious share holdings held by Maduka and Ezenna that BankPHB had bought; this, inclusive of the shareholdings in the bank by Ondo State Government.

Sources informed FORTUNE&CLASS that for yet to be ascertained reasons, the CBN encouraged BankPHB to acquire the questionable shares which, a lawyer that we crosschecked with, said that at the minimum, should be warehoused as directed by the CBN until all issues pertaining to the post-merger adjustments are settled.

“The target for BankPHB was to acquire 30 per cent of the total holdings of Spring Bank. I think with the collaboration of the CBN they got Maduka and Ezenna and one other legacy bank director to sell the warehoused shares. At a premium for that matter, I mean, they sold it above going market rate. I am informed that BankPHB bought a unit of these shares from these men at between N8 and N8.50K, and we are talking of about 4billion units here.

“You may need to question the rationale of Francis Atuche, who is the Managing Director of the Bank spending this much of depositors’ funds on shares that are still subject to various court decisions and have been expressly described as not being attributable to the share capital of Spring Bank.”

Another source informed that BankPHB might truly have been encouraged by CBN because as the apex regulatory body of banks, the CBN should have known the controversial status of the shares acquired by BankPHB.

Even more curious is the role of the Securities and Exchange Commission in the controversial acquisition.

“While it is agreed in the company’s law that once a corporate body had acquired 30 per cent holdings in a target company it can apply to the SEC to commence a take-over bid, yet it is the responsibility of the SEC to ensure the status of the shareholding before giving the go ahead for the take-over process,” a lawyer informed.

But it would seem for other reasons the SEC did not give consideration to this requirement, reports indicated that the representatives of SEC were available at the Extraordinary General Meeting which BankPHB called as the first step to commencing the acquisition of the Spring Bank.

“The issue here is about the law, justification and equity,” the lawyer, who is knowledgeable in the matter concerning the controversial acquisition of bubble shares of Spring Bank, said.

“In the first instance, a court of law had ruled that the Extra Ordinary General Meeting should not hold and all the parties involved were served, including the SEC. Beyond the pronouncement of the court, it is also a statutory requirement of the law that if a take-over company was to hold an Extra Ordinary General Meeting where the issue on the agenda will be the resolution to support the acquisition of a company, the shareholders of the company to be taken over must meet at the another venue but at the precise time the take-over company is meeting. The shareholders of the target company must vote to accept the take-over bid.”

As things stand, the court has been active in the matter of the controversial acquisition. Various orders had earlier been made forbidding the sale of shares by any directors or shareholders of Spring Bank. And to put bite to the orders, the court presided over by Justice Hamed Ramat Mohammed, last week, extended the interim order restraining Spring Bank from any planned merger or acquisition with any other bank.

Again, more curious in the apparent under the table manoeuvres of the acquisition of Spring Bank, was the sudden lifting of the full suspension placed on the trading of the shares of the bank. When a share is placed on full suspension it is not permitted to be traded on. But weeks ago, the management of the Nigerian Stock Exchange suddenly upgraded the full suspension to technical suspension. When a stock is placed on technical suspicion it can be traded on, that is, buy and sell orders can be effected on it but the price would not move either upward or downward.

Suddenly, the shares of Spring Bank turned the golden pearl of the Exchange as massive volume activities were recorded on it. Those that continued to follow the unfolding issues of the bank’s acquisition submitted that the volume activities on the bank’s shares should not be surprising because of the obvious intention of BankPHB.

The upgrading of the full suspension on the stock of Spring Bank to technical throws more questions on the role of the NSE in the acquisition of the bank.

But what should worry depositors of BankPHB is the possibility of the court ruling, in the final analysis, against the acquisition of Spring Bank essentially as a result of the doubtful status of the shares so acquired. When that happens, it means that about N40billion of BankPHB’s depositors’ fund would have simply vanished into the pockets of a number of highly positioned business personalities.